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Capitol Comment

The Senate and Obama administration are pushing to pass a massive new regulatory regime for financial markets that promises more government involvement and potentially leaves taxpayers holding the bag for bad decisions made on Wall Street.The House passed legislation late last year, and now Sen. Chris Dodd (D-Conn.) is working to pass the Senate version—the Restoring American Financial Stability Act of 2010—so a final bill can be sent for the president’s signature. Unfortunately, the bill does little to address the underlying causes of the financial crisis and instead inserts the government into financial markets in ways that provide Wall Street access to taxpayer dollars should they fall on hard times.Among other things, the bill creates a new standard providing firms deemed “too big to fail” permanent access to TARP-like bailouts without even needing a vote by elected officials.

The Restoring American Financial Stability Act represents a significant intrusion by government into financial markets and poses significant concerns about moral hazard and other unintended consequences.New fees, regulations, and reporting requirements threaten jobs, global competitiveness, and capital formation—the engine of economic growth.At the same time, the legislation creates sweeping new powers for the oversight of private businesses, from insurance to banks to mortgage brokers.A new consumer protection agency will enact new regulations that may have the unintended consequence of limiting access to credit while raising the price of credit.Ultimately, consumers bear the brunt of the legislation through higher taxes and a tighter credit market.

Much of the current economic crisis was caused by loose monetary policy at the Federal Reserve coupled with federal housing policies and political objectives that fueled the subprime bubble in the mortgage markets. And while many rightly point to concerns in this sector of the economy, the administration and Congress should be wary of imposing unnecessary regulations or exposing taxpayers to new liabilities in financial markets.

A rush for federal intervention sends the wrong signal that risky behavior will be subsidized while making it more difficult for consumers and businesses seeking access to credit.The market currently is in a correction, sorting out the missteps of the recent financial crisis. It is a costly and sometimes painful process, but increased federal involvement will not improve the outcome.In fact, the legislation may generate new uncertainties and burdens that actually hamper the correction process.Congress should be wary of the impacts such legislation would have on financial markets and evaluate all the consequences—intended and unintended—before imposing such substantial regulations and fees on this critical sector of our economy.

Despite the obvious benefits of investment and risk-taking for our economy, the Senate legislation would impose a tighter regulatory regime on all forms of financial services, including areas that had little to do with the financial crisis.For example, new standards for “angel investors” in startup companies would make it more difficult to raise venture capital.Caution is required to avoid creating a regulatory monolith with sweeping new powers that does more harm than good.

In addition to new reporting and oversight requirements, the legislation also creates a new “systemic risk regulator,” to provide oversight of firms deemed too big to fail.In exchange for this increased oversight, firms would have access to taxpayer funds if a bailout became necessary.At the same time, this new regulator would have the authority to break up, shut down, and control these companies, moving these critical decisions from the marketplace to the government.By its very nature, “stability” is a difficult and nebulous policy goal subject to political pressure and manipulation, making it difficult to achieve an outcome superior to that of the market.

Even worse, taxpayers may become the ultimate backstop for risky private investments, as firms deemed “too big to fail” by systemic risk regulators are granted perennial bailouts funded by a government trust fund.Not only would these changes hamper economic growth, but they also turn our understanding of markets upside-down, separating risk from reward by providing private firms access to federal support should their investments sour, while they enjoy the profits generated in the good times.This distorts the flow of capital as firms that qualify for an implicit government backstop can attract capital easier than smaller competitors who may, in fact, be more efficient.Rather than the “crackdown on Wall Street” proclaimed by the bill’s advocates, these rules further insulate the large firms from competition.

The zeal for regulatory engineering must be tempered with an understanding of markets. By definition markets are risky. They can be volatile, they can be self-correcting, and they can be used to manage risk, but they cannot be controlled by even the best regulatory plans.It is very difficult to measure capital accurately and, with enough creativity, banks can always work around any potential regulatory scheme.

The Restoring American Financial Responsibility Act would create changes whose effects will linger long into the future.The bill would severely distort the workings of the market while transferring the burden of risk to the taxpayer.This legislation does little to restore responsibility but instead chooses to absolve the big players on Wall Street from responsibility for their mistakes via access to a taxpayer-funded bailout.And this access comes at a steep price—broad new government controls over private markets that touch on virtually all aspects of the financial services sector.

1) Video of the Week: In this video, American political scientist, Charles Murray, explains how deeply entrenched regulatory state tyranny is in our legal system, and how everyday Americans can fight back.

The Department of Health and Human Services, Department of Labor, and the Department of the Treasury have released a final rule that expands short-term, limited-duration health insurance plans. The rule, which will be published on Friday and take effect in 60 days, will expand these plans to 12 months from three months and allow renewability for up to 36 months.

Responding to reports that Interior Secretary Ryan Zinke is set to meet with North Carolina Governor Roy Cooper this weekend, FreedomWorks Vice President of Advocacy Noah Wall urged Governor Cooper to listen to several other elected officials in North Carolina who support the recent proposal by the Department of Interior to expand the nation’s offshore oil and gas exploration plan:

On behalf of our activist community, I urge you to contact your representative and ask him or her to support the Reset Act, H.R. 3442, introduced by Rep. Ted Budd (R-N.C.). The bill would require a review of all major federal regulations and allow Congress the option to overturn any such regulation through a majority vote in both houses.

On Wednesday, the House Oversight and Government Affairs Committee held a hearing (more of a grilling) as Mylan’s CEO, Heather Bresch, the daughter of Sen. Joe Manchin (D-W.V.) took to the floor to give a defense of the EpiPen’s price hikes and to receive a verbal smackdown from an assortment of legislators.

FreedomWorks Foundation drove more than 21,000 responses against new rules proposed by the U.S. Department of Education that would implement parts of the Every Student Succeeds Act (ESSA) that was passed by Congress in December 2015 and signed into law by President Barack Obama. The comment period for the proposed rules ended on Monday, August 1.